ISLA together with the RMA and PASLA has submitted a comment letter to the FSB by way of follow-up to FSB DEG meeting in London on 26th August. A full copy of the joint industry response is available here .
General Comments
In our previous joint letter we highlighted a number of principles that we believe would assist in developing an accurate view of the global securities lending market for the monitoring of systemic risk. These principles included:-
The collection of position level data for securities lending and borrowing is far superior to flow or transactional data. Flow data is noisy, difficult to interpret and would require careful re-aggregation in order to build up a picture of risks and exposures in the system. Position level data by contrast should be relatively easy to aggregate and by comparing snapshots of positions over time it would also be possible to identify trends.
Collateral should be reported separately to loan positions. Non-cash collateral is often managed on a portfolio basis and individual collateral items cannot be linked to loan positions.
Collateral reuse data may be impractical to collect. In this regard it is important to recognise that any subsequent reuse or re-hypothecation of collateral is typically driven by the aims and objectives of the receiving party and there is a clear distinction between institutional lenders [who lend their assets to a borrower, usually a bank or broker/dealer, through an agency lending program) and brokers or banks [who lend and borrow assets as principal] that may hold and think about collateral very differently. Today very little collateral received by institutional lenders [who lend their assets to a borrower through an agency lending program] is actively re-used with most being held within tri-party collateral arrangements. Conversely where banks using securities lending techniques [not in an agency lending context] receive collateral it is normally held in a central pool and managed as part of the banks overall liquidity process. Consequently and unlike the institutional lending sector [in an agency lending context] collateral received is likely to be reused (We would also refer you to our comments below and to our joint response letter to the FSB dated 12th February 2015).
The FSB should establish standards detailing the reporting entity, scope of data, and regulator reach (who reports what data and to who) and ideally the standards should also set the types of data that should be reported. The objective being to reduce the burden of removing double counting and ensuring that the data collected is comprehensive.
Published data should be aggregated and anonymous. We remain very mindful that much of the underlying data is both confidential and proprietary. As such, banking entities that serve as lending agents or prime brokers are both contractually and legally (by applicable federal or state statute) prohibited from disclosing underlying client identifiable data to the FSB or other bodies unless required to do so by its applicable regulators. Therefore, we would stress the importance of ensuring that local/regional regulators and the FSB put in place robust procedures to ensure data integrity and confidentiality in a manner consistent with applicable local/regional laws governing protection of client’s confidential information.